The oil price keeps creeping higher (it’s near a record high as we write this.) It’s dawning on the world that the supply of cheap and easy-to-recover oil is dwindling…and fast.
A motley crew of small companies and radical entrepreneurs have responded to this latest oil shock (although this shock is a permanent one and not just an Arab oil embargo) by looking for other ways to produce the energy the world has come to depend on and desperately needs for future growth. But not all energy alternatives are equal. There are three qualities a commercially-viable energy company must have to compete for investor money today.
First, renewable energy moves the front of the line. Fossil fuels deplete. Wind, waves, and sun do not. Renewable energy solves one of the key problems of the current predicament. Next is reliability. You burn coal and natural gas to produce electricity. This electricity powers factories, hospitals, restaurants, homes, and businesses. The base load required to keep the electric grid buzzing with electrons is enormous. A true energy alternative must be “scalable” so it can meet the base load needs we’ve come to expect.
Finally, the cleaner the energy the better. Say what you will about climate change, global warming, and carbon dioxide emissions. Is the planet heating up? Are humans the cause of it? All of these questions have become highly political. But at this point, from an investment perspective, it doesn’t much matter what the answers are. Clean energies that don’t require burning fossil fuels to produce electric power or liquid fuels enjoy tremendous political support.
Geothermal Heats Up
Here in Australia the surging Labour party is eager to promote a new source of energy, geothermal energy, as an alternative to a domestic nuclear industry. If Labour wins the federal election, expect to see a bull market in geothermal stocks.
Yet there is more to the geothermal energy story that the fact that green politicians have embraced it. For alternative energy technologies to be adopted at the commercial level, they must truly provide reliable, safe, and clean power to real customers, and soon. The companies must also provide investors with growing earnings and profits without huge start-up cost blow-outs.
But I’m probably getting ahead of myself here. What is geothermal energy anyway? How does the heat from the earth produce electricity you can turn on with the flick of a light switch? Why is Australia perfectly situated to have one of the best geothermal sectors in the world? And of course, how can you participate as an investor?
The short version of how how geothermal energy works is easy. The Earth has molten core. About 3-6km below the surface of the Earth, in some places, is a layer of super hot granite that can be as hot as 250 degrees centigrade. One cubic kilometre of hot granite at 250 degrees centigrade has as much energy in it as 40 million barrels of oil.
By nature of its geology, Australia has a lot of hot granite that’s within 3-5km of the surface of the earth. One Australian company I’m going to show you in a moment has a proven technology that turns the heat stored in that hot granite into clean electric power. It’s called Hot Fractured Rock (HFR) geothermal power.
HFR is different from what you might call “wet” geothermal power. “Wet” geothermal happens when you find a volcanically active area of the Earth where super hot water or steam already exists on or close to the surface. In New Zealand, for example, between Rotorua and Auckland you’ll find a geothermal facility that turns the hot steam from the surrounding countryside into electricity via steam powered turbines. As you’ve no doubt noticed, Australia is not volcanically active. Enter the hot rocks.
By injecting water deep into the hot granite rocks below the surface of the earth, HFR geothermal turns the stored heat of those rocks into geothermal energy. The injected water captures the heat of the rocks and then, through a heat exchanger, heats a fluid that powers a turbine to spin out electricity. You can see from the figure below how the whole process works for both a “wet” geothermal system (on the left), and a “dry” hot fractured rock system (on the right).
Now that you know more about how geothermal energy works and why Australia is blessed with a lot of hot granite just waiting to be turned into electricity, you’re probably wondering how to invest in the growth of the industry. But before you can do that, there are a few questions worth considering.
With any small business you always ask basic questions. How do you make money? How much cash do you have? How soon will you make more money? What’s your biggest risk? Who’s your biggest competitor?
If a company can’t—or won’t—answer these questions, then you may have a management team that can’t turn the product or idea into a real business with real profits. That’s the risk of small company investing. The company could fail.
But the reward is that if it makes it big, it could make it really big.
Markets and Money